Solution Manual .
Principles of Corporate Finance
. . .
by Richard A. Breadley, Stewart C. Myers, Franklin Allen, Alex Edmans
. . . . . . . . . .
14th Edition
.
SOLUTION MANUAL!!! .
, CHAPTER.1
Introduction.to.Corporate.Finance
The.values.shown.in.the.solutions.may.be.rounded.for.display.purposes..However,.the.answers.were.derived.u
sing.a.spreadsheet.without.any.intermediate.rounding.
Answers.to.Problem.Sets
1. a. real
b. executive.airplanes
c. brand.names
d. financial
e. bonds
*f. investment.or.capital.expenditure
*g. capital.budgeting.or.investment
h. financing
*Note.that.f.and.g.are.interchangeable.in.the.question.
Est.time:.01-05
2. A.trademark,.a.factory,.undeveloped.land,.and.your.work.force.(c,.d,.e,.and.g).are.all.real.assets..Real.
assets.are.identifiable.as.items.with.intrinsic.value..The.others.in.the.list.are.financial.assets,.that.is,.th
ese.assets.derive.value.because.of.a.contractual.claim.
Est.time:.01-05
3. a.
Financial.assets,.such.as.stocks.or.bank.loans,.are.claims.held.by.investors..Corporati
ons.sell.financial.assets.to.raise.the.cash.to.invest.in.real.assets.such.as.plant.and.equipme
nt..Some.real.assets.are.intangible.
b. Capital.expenditure.means.investment.in.real.assets..Financing.means.raising.the.cash.for.
this.investment.
c. The.shares.of.public.corporations.are.traded.on.stock.exchanges.and.can.be.purchased.by.
a.wide.range.of.investors..The.shares.of.closely.held.corporations.are.not.publicly.traded.an
d.are.held.by.a.small.group.of.private.investors.
d. Unlimited.liability:.Investors.are.responsible.for.all.the.firm‘s.debts..A.sole.proprietor.has.unli
mited.liability..Investors.in.corporations.have.limited.liability.. They.can.lose.their.investme
nt,.but.no.more.
Est.time:.01-05
,4. Items.c.and.d.apply.to.corporations.. Because.corporations.have.perpetual.life,.ownership.can.be.tran
sferred.without.affecting.operations,.and.managers.can.be.fired.with.no.effect.on.ownership..Other.fo
rms.of.business.may.have.unlimited.liability.and.limited.life.
Est.time:.01-05
5. Separation.of.ownership.facilitates.the.key.attributes.of.a.corporation,.including.limited.liability.for.inv
estors,.transferability.of.ownership,.a.separate.legal.personality.of.the.corporation,.and.delegated.ce
ntralized.management.. These.four.attributes.provide.substantial.benefit.for.investors,.including.the.
ability.to.diversify.their.investment.among.many.uncorrelated.returns—
a.very.valuable.tool.explored.in.later.chapters.. Also,.these.attributes.allow.investors.to.quickly.exit,.en
ter,.or.short.sell.an.investment,.thereby.generating.an.active.liquid.market.for.corporations.
However,.these.positive.aspects.also.introduce.substantial.negative.externalities.as.well.. The.separ
ation.of.ownership.from.management.typically.leads.to.agency.problems,.where.managers.prefer.to.c
onsume.private.perks.or.make.other.decisions.for.their.private.benefit—
rather.than.maximize.shareholder.wealth.. Shareholders.tend.to.exercise.less.oversight.of.each.indiv
idual.investment.as.their.diversification.increases.. Finally,.the.corporation‘s.separate.legal.personalit
y.makes.it.difficult.to.enforce.accountability.if.they.externalize.costs.onto.society.
Est.time:.01-05
6. Shareholders.will.only.vote.to.maximize.shareholder.wealth.. Shareholders.can.modify.their.patt
ern.of.consumption.through.borrowing.and.lending,.match.risk.preferences,.and.hopefully.balanc
e.their.own.checkbooks.(or.hire.a.qualified.professional.to.help.them.with.these.tasks).
Est.time:.01-05
7. If.the.investment.increases.the.firm‘s.wealth,.it.increases.the.firm‘s.share.value.. Ms..Espinoza.coul
d.then.sell.some.or.all.these.more.valuable.shares.to.provide.for.her.retirement.income.
Est.time:.01-05
8. a.
Assuming.that.the.encabulator.market.is.risky,.an.8%.expected.return.o
n.the.F&H.encabulator.investments.may.be.inferior.to.a.4%.return.on.U.S.
government.securities,.depending.on.the.relative.risk.between.the.two.assets.
b. Unless.the.financial.assets.are.as.safe.as.U.S..government.securities,.their.cost.of.capital.wou
ld.be.higher..The.CFO.could.consider.expected.returns.on.assets.with.similar.risk.
Est.time:.06-10
9. Managers.would.act.in.shareholders‘.interests.because.they.have.a.legal.duty.to.act.in.their.interests..
Managers.may.also.receive.compensation—
.bonuses,.stock,.and.option.payouts.with.value.tied.(roughly).to.firm.performance.. Managers.may.fea
r.personal.reputational.damage.from.not.acting.in.shareholders‘.interests..And.managers.can.be.fired.
by.the.board.of.directors.(elected.by.shareholders).. If.managers.still.fail.to.act.in.shareholders‘.interes
ts,.shareholders.may.sell.their.shares,.lowering.the.stock.price.and.potentially.creating.the.possibility.
of.a.takeover,.which.can.again.lead.to.changes.in.the.board.of.directors.and.senior.management.
Est.time:.01-05
, 10. Managers.that.are.insulated.from.takeovers.may.be.more.prone.to.agency.problems.and.therefore.m
ore.likely.to.act.in.their.own.interests.rather.than.in.shareholders‘.. If.a.firm.instituted.a.new.takeover.de
fense,.we.might.expect.to.see.the.value.of.its.shares.decline.as.agency.problems.increase.and.less.s
hareholder.value.maximization.occurs..The.counterargument.is.that.defensive.measures.allow.man
agers.to.negotiate.for.a.higher.purchase.price.in.the.face.of.a.takeover.bid—
to.the.benefit.of.shareholder.value.
Est.time:.01-05
Appendix.Questions:
1. Both.would.still.invest.in.their.friend‘s.business.. A.invests.and.receives.$121,000.for.his.investm
ent.at.the.end.of.the.year—
which.is.greater.than.the.$120,000.that.would.be.received.from.lending.at.20%.($100,000.×.1.20.
=.$120,000).. G.also.invests,.but.borrows.against.the
$121,000.payment,.and.thus.receives.$100,833.($121,000./.1.20).today.
Est.time:.01-05
2. a..He.could.consume.up.to.$200,000.now.(forgoing.all.future.consumption).or.up.to.$216,000.next.ye
ar.($200,000.×.1.08,.forgoing.all.consumption.this.year)..He.should.invest.all.of.his.wealth.to.earn.$21
6,000.next.year.. To.choose.the.same.consumption.(C).in.both.years,.C.=.($200,000.–
.C).×.1.08.=.$103,846.
Dollars.Next.Year
220,000
216,000
203,704
200,000
Dollars.Now
b. He.should.invest.all.of.his.wealth.to.earn.$220,000.($200,000.×.1.10).next.year.. If.he.consumes.al
l.this.year,.he.can.now.have.a.total.of.$203,703.70.($200,000.×.1.10/1.08).this.year.or.$220,000.next.
year.. If.he.consumes.C.this.year,.the.amount.available.for.next.year‘s.consumption.is.($203,703.70.
–
.C).×.1.08.. To.get.equal.consumption.in.both.years,.set.the.amount.consumed.today.equal.to.the.am
ount.next.year:
C.=.($203,703.70. –.C). ×.1.08
C.=.$105,769.20
Est.time:.06-10
Principles of Corporate Finance
. . .
by Richard A. Breadley, Stewart C. Myers, Franklin Allen, Alex Edmans
. . . . . . . . . .
14th Edition
.
SOLUTION MANUAL!!! .
, CHAPTER.1
Introduction.to.Corporate.Finance
The.values.shown.in.the.solutions.may.be.rounded.for.display.purposes..However,.the.answers.were.derived.u
sing.a.spreadsheet.without.any.intermediate.rounding.
Answers.to.Problem.Sets
1. a. real
b. executive.airplanes
c. brand.names
d. financial
e. bonds
*f. investment.or.capital.expenditure
*g. capital.budgeting.or.investment
h. financing
*Note.that.f.and.g.are.interchangeable.in.the.question.
Est.time:.01-05
2. A.trademark,.a.factory,.undeveloped.land,.and.your.work.force.(c,.d,.e,.and.g).are.all.real.assets..Real.
assets.are.identifiable.as.items.with.intrinsic.value..The.others.in.the.list.are.financial.assets,.that.is,.th
ese.assets.derive.value.because.of.a.contractual.claim.
Est.time:.01-05
3. a.
Financial.assets,.such.as.stocks.or.bank.loans,.are.claims.held.by.investors..Corporati
ons.sell.financial.assets.to.raise.the.cash.to.invest.in.real.assets.such.as.plant.and.equipme
nt..Some.real.assets.are.intangible.
b. Capital.expenditure.means.investment.in.real.assets..Financing.means.raising.the.cash.for.
this.investment.
c. The.shares.of.public.corporations.are.traded.on.stock.exchanges.and.can.be.purchased.by.
a.wide.range.of.investors..The.shares.of.closely.held.corporations.are.not.publicly.traded.an
d.are.held.by.a.small.group.of.private.investors.
d. Unlimited.liability:.Investors.are.responsible.for.all.the.firm‘s.debts..A.sole.proprietor.has.unli
mited.liability..Investors.in.corporations.have.limited.liability.. They.can.lose.their.investme
nt,.but.no.more.
Est.time:.01-05
,4. Items.c.and.d.apply.to.corporations.. Because.corporations.have.perpetual.life,.ownership.can.be.tran
sferred.without.affecting.operations,.and.managers.can.be.fired.with.no.effect.on.ownership..Other.fo
rms.of.business.may.have.unlimited.liability.and.limited.life.
Est.time:.01-05
5. Separation.of.ownership.facilitates.the.key.attributes.of.a.corporation,.including.limited.liability.for.inv
estors,.transferability.of.ownership,.a.separate.legal.personality.of.the.corporation,.and.delegated.ce
ntralized.management.. These.four.attributes.provide.substantial.benefit.for.investors,.including.the.
ability.to.diversify.their.investment.among.many.uncorrelated.returns—
a.very.valuable.tool.explored.in.later.chapters.. Also,.these.attributes.allow.investors.to.quickly.exit,.en
ter,.or.short.sell.an.investment,.thereby.generating.an.active.liquid.market.for.corporations.
However,.these.positive.aspects.also.introduce.substantial.negative.externalities.as.well.. The.separ
ation.of.ownership.from.management.typically.leads.to.agency.problems,.where.managers.prefer.to.c
onsume.private.perks.or.make.other.decisions.for.their.private.benefit—
rather.than.maximize.shareholder.wealth.. Shareholders.tend.to.exercise.less.oversight.of.each.indiv
idual.investment.as.their.diversification.increases.. Finally,.the.corporation‘s.separate.legal.personalit
y.makes.it.difficult.to.enforce.accountability.if.they.externalize.costs.onto.society.
Est.time:.01-05
6. Shareholders.will.only.vote.to.maximize.shareholder.wealth.. Shareholders.can.modify.their.patt
ern.of.consumption.through.borrowing.and.lending,.match.risk.preferences,.and.hopefully.balanc
e.their.own.checkbooks.(or.hire.a.qualified.professional.to.help.them.with.these.tasks).
Est.time:.01-05
7. If.the.investment.increases.the.firm‘s.wealth,.it.increases.the.firm‘s.share.value.. Ms..Espinoza.coul
d.then.sell.some.or.all.these.more.valuable.shares.to.provide.for.her.retirement.income.
Est.time:.01-05
8. a.
Assuming.that.the.encabulator.market.is.risky,.an.8%.expected.return.o
n.the.F&H.encabulator.investments.may.be.inferior.to.a.4%.return.on.U.S.
government.securities,.depending.on.the.relative.risk.between.the.two.assets.
b. Unless.the.financial.assets.are.as.safe.as.U.S..government.securities,.their.cost.of.capital.wou
ld.be.higher..The.CFO.could.consider.expected.returns.on.assets.with.similar.risk.
Est.time:.06-10
9. Managers.would.act.in.shareholders‘.interests.because.they.have.a.legal.duty.to.act.in.their.interests..
Managers.may.also.receive.compensation—
.bonuses,.stock,.and.option.payouts.with.value.tied.(roughly).to.firm.performance.. Managers.may.fea
r.personal.reputational.damage.from.not.acting.in.shareholders‘.interests..And.managers.can.be.fired.
by.the.board.of.directors.(elected.by.shareholders).. If.managers.still.fail.to.act.in.shareholders‘.interes
ts,.shareholders.may.sell.their.shares,.lowering.the.stock.price.and.potentially.creating.the.possibility.
of.a.takeover,.which.can.again.lead.to.changes.in.the.board.of.directors.and.senior.management.
Est.time:.01-05
, 10. Managers.that.are.insulated.from.takeovers.may.be.more.prone.to.agency.problems.and.therefore.m
ore.likely.to.act.in.their.own.interests.rather.than.in.shareholders‘.. If.a.firm.instituted.a.new.takeover.de
fense,.we.might.expect.to.see.the.value.of.its.shares.decline.as.agency.problems.increase.and.less.s
hareholder.value.maximization.occurs..The.counterargument.is.that.defensive.measures.allow.man
agers.to.negotiate.for.a.higher.purchase.price.in.the.face.of.a.takeover.bid—
to.the.benefit.of.shareholder.value.
Est.time:.01-05
Appendix.Questions:
1. Both.would.still.invest.in.their.friend‘s.business.. A.invests.and.receives.$121,000.for.his.investm
ent.at.the.end.of.the.year—
which.is.greater.than.the.$120,000.that.would.be.received.from.lending.at.20%.($100,000.×.1.20.
=.$120,000).. G.also.invests,.but.borrows.against.the
$121,000.payment,.and.thus.receives.$100,833.($121,000./.1.20).today.
Est.time:.01-05
2. a..He.could.consume.up.to.$200,000.now.(forgoing.all.future.consumption).or.up.to.$216,000.next.ye
ar.($200,000.×.1.08,.forgoing.all.consumption.this.year)..He.should.invest.all.of.his.wealth.to.earn.$21
6,000.next.year.. To.choose.the.same.consumption.(C).in.both.years,.C.=.($200,000.–
.C).×.1.08.=.$103,846.
Dollars.Next.Year
220,000
216,000
203,704
200,000
Dollars.Now
b. He.should.invest.all.of.his.wealth.to.earn.$220,000.($200,000.×.1.10).next.year.. If.he.consumes.al
l.this.year,.he.can.now.have.a.total.of.$203,703.70.($200,000.×.1.10/1.08).this.year.or.$220,000.next.
year.. If.he.consumes.C.this.year,.the.amount.available.for.next.year‘s.consumption.is.($203,703.70.
–
.C).×.1.08.. To.get.equal.consumption.in.both.years,.set.the.amount.consumed.today.equal.to.the.am
ount.next.year:
C.=.($203,703.70. –.C). ×.1.08
C.=.$105,769.20
Est.time:.06-10
